Annuities & Life Insurance
Life Insurance
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Withdrawal Options if annuitized in decreasing order:
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What is an equity indexed annuity?
A type of fixed annuity (no risk to principal unless extra rider options chosen) in which the interest rate credited is determined by following an index like the S&P 500, Nasdaq 100, Russell 2000, MSCI EAFE, etc. over a period of time to provide more potential interest than fixed annuities.
What is a deferred annuity?
An annuity that provides payments at some point in the future.
What is a bonus annuity?
An annuity where the client receives a special credit upon signing the contract in addition to the normal interest credited.
What is a fixed annuity?
An annuity where the principal is guaranteed and the client gets a specific interest rate over a period of time.
What is Joint & Survivor annuity withdrawal option?
Based on 2 or more lives.
What is an annuity?
Contracts sold by an insurance company to provide payments at specified intervals based on the life of the person of interest called the annuitant.
What is a Variable Annuity
Deposits are placed in sub-accounts containing mutual funds. You must give the client a prospectus which outlines the terms of the variable annuity contract.
Who bears the risk with fixed annuities?
Insurance company bears the risk and client gets guarantee of principal with less growth potential.
What is an Installment refund withdrawal option?
Like period certain but the payments continue until the payments to the annuitant and beneficiaries equal the initial lump sum payment.
All annuities provide tax deferral when they are not in qualified accounts, so they are often used as retirement savings vehicles. They must be able to be annuitized (trade their value for a series of payments over time) to get this special tax treatment.
Most annuities provide for withdrawals of 10% of the deposit in any contract year. Death, disability, terminal illness, or nursing home stays often are provided as free withdrawal events, as well. Any amount above that incurs a surrender charge for the amount that exceeds 10%. Surrender charges are very high so no annuity should be sold with the anticipation of needing to incur a surrender charge. Surrender charges typically gradually decline each year
Example of a Rider?
One example would be a death benefit rider. No matter the value of the contract, the death benefit may guarantee to increase a certain percentage.
What are Riders?
Optional added features attached to annuity contracts. They also normally charge additional fees and expenses for the benefit of the rider. Another popular feature is that each year if the contract value exceeds the death benefit value, the contract value becomes the minimum death benefit value even if the contract value later goes down.
What is Single life withdrawal option?
Payments continue until annuitant passes away.
What is Life annuity with period certain withdrawal option?
Pays for life but if you die before the period, such as 10 years, your beneficiary receives the remaining payments.
Is the principal guaranteed in a variable annuity?
Principal is NOT guaranteed.
What is a spread?
Spread - An amount subtracted from the index performance (Subtract a spread, if the spread is 2 and the market is up 30, it is 28)
If the immediate annuity is in a Roth account...
The entire amount is not taxable
If the immediate annuity is in a non-Roth retirement account...
The entire amount is taxable
What is the exclusion ratio?
The exclusion ratio determines what percentage is taxable if the assets were not in a retirement account.
What is a cap?
The maximum amount of interest paid during the time period. (The stock market is up 10%, and you paid for the 4%, then you only get that 4%, while the insurance company gets the other 6%)
What are the payments like for an immediate annuity?
The payments are both a return of premium and interest payments combined into one payment.
What is Participation Rate?
The percentage of the index given as interest (For example, if the participation rate is 75% for a fixed-indexed annuity that is based on the S&P 500®, and the S&P 500® increases 10% for the year, the contract would be credited with 7.5%.)
What are the terms like for bonus annuities like and how are the surrender penalties?
These annuities often have longer terms and more onerous surrender penalties if you withdraw the money before the end of the term.
How can deferred annuities be funded?
They can be funded either by a single premium or periodic premiums.
Characteristics of Variable Annuities?
Variable annuities have higher expenses More growth potential Investor takes the risk
What are the withdrawal penalties for annuities?
When withdrawals are taken, the taxable interest is considered withdrawn first. They are subject to the same 59 ½ year old age requirement as IRA's, so withdrawals before that age are subject to the 10% early withdrawal penalty.
What is an immediate annuity? *Think single premium*
You put in a lump sum of money (single premium) in exchange for a series of payments of a period certain (i.e. 10 years, 20 years) or life of the annuitant(s).
